Can the Saudi Oil Price Gambit Still be Foiled?

June 07, 2016

Carl Pope is former Executive Director of the Sierra Club, and current Principal, Inside Straight Strategies.

Oil touched $50 last week, close to double its slump price earlier this year, before falling slightly below that benchmark. Short-term impacts—the wildfire in Canada and outages in Nigeria—helped reduce stocks and drive up the price; then Iraq production increases stalled the rally. The market seemed to have averted the risk of an extended period of $20-30 prices, unsustainable for oil dependent nations, even the richest like the Saudis, whose “pump and dump” strategy lies behind the current low-price environment.

Even if U.S. shale roars back in response, it can’t make up for an investment slump everywhere else. The Saudis can then set the price they want.

At $40-60/barrel, however, the Saudis can stay the course. They can afford that price in terms of their budget deficit, if not easily. Some US shale plays come back into production, but the capital heavy projects in the Arctic, ultra-deep ocean or Canadian tar sands are still off the table as prudent investments. Medium term, as non-OPEC, non-shale production falls, with no new big ticket projects coming on-line to replace depleted wells, reserves fall. Increasing demand will then require increasing dependence on OPEC and soaring prices. Even if U.S. shale roars back in response, it can’t make up for an investment slump everywhere else. The Saudis can then set the price they want.

Kossovo is not alone. Wiki-Leaks found that the Saudi consulate in New Delhi had 140 imams on its payroll—and Indian Muslims lament the erosion of the tolerant Islam that was indigenous to their country.

In Washington, efforts to disclose the role of the Saudis in the 9-11 attacks, laid out in 28 still secret pages of the 9-11 Commission Report, are still stalled by counter-lobbying from the Saudi Government—although some of its representatives have previously asserted they have nothing to hide and would welcome the release of the documents.

So cheaper oil, even oil below $50, has not freed the United States from the security threats of oil’s monopoly over global transportation, while it has threatened to continue (or even exacerbate) the escalating disruption of global climate stemming from continued reliance on oil and other fossil fuels.

The Saudi Strategy to extend oil’s hegemony seems to be gathering steam.

But technology and politics are hinting there is a pathway to a world Beyond Oil. Recent months have been full of breakthroughs among advocates of clean transportation technologies like EV’s. The biggest splash was Elon Musk’s staggering 400,000 early orders for the launch of his Model 3. But significant new opportunities for EVs were also signaled by the declaration by Indian Energy Minister Piyush Goyal that he wanted a national goal of complete electrification of the Indian motor vehicle fleet by 2030! The German Government, its market lagging the rest of Europe in EV sales, committed $1.4 billion to catch up. The Austrian Ministry of Agriculture and Environment is working on a plan that would ban the sale of new gas and diesel cars by 2020. Lawmakers in the lower house of the Dutch Parliament approved a motion in March that would ban the sale of new gas and diesel cars five years later.

These kinds of policy support for a more rapid transition to cleaner, non-petroleum based transportation choices matter—a lot. Indeed, even if clean transportation vehicles have higher sticker prices than diesel or gasoline engines, their positive impact on future oil prices makes them a very good deal for oil importers like the EU, the U.S., India and China. A recent study by Cambridge Econometrics, Oil Market Futures,concluded that investing in clean transportation could help head off the next oil price spike. It also found that without such leadership, oil prices could easily reach $130 by 2050, even though most of the U.S. shale reserves would become profitable again once prices reach $80. Importantly, it estimated public policies to encourage reduced reliance on oil could save $33 trillion in transportation spending over the decade from 2020-2030.

Donald Trump, of course, thinks the answer is simply to drill even more wells, precisely the strategy that has left us vulnerable to the Russians and Saudis today.

What is lacking, particularly in the US, is a robust public conversation about breaking oil’s monopoly and replacing it with cleaner transportation energy. While states on the West Coast and in the Northeast push for lower oil dependence, and the Obama Administration works on fuel economy standards, the oil and auto industries are gearing up a massive political assault on these efforts. Oil companies are pouring tens of millions of dollars in campaign contributions into California legislative efforts. The President has done little to make the fight to get off oil a clear priority for his final year in office. Donald Trump, of course, thinks the answer is simply to drill even more wells, precisely the strategy that has left us vulnerable to the Russians and Saudis today.

But one intriguing idea has been offered up—that the next President should set up a National Commission to investigate the manipulation of the global oil market by exporters like Saudi Arabia, Russia, and Iran. The idea was offered by Securing America’s Future Energy, a coalition of business and national security leaders. SAFE’s goal is not so much to discover new conspiracies—OPEC conducts its market manipulation in the broad light of day, and economists have agreed for decades that in a competitive oil market, prices would be far lower.

But what has been lacking is a mechanism to focus public attention on the problem, and the solution—ensuring that Americans have genuine transportation choices rather than being forced to fuel up with gasoline, diesel or jet fuel all derived from crude oil. SAFE’s proposed OPEC Commission could serve that function, forcing Washington to address the problem. The first Congressional support for the idea came from some interesting sources: Arizona Republican Congressman Trent Franks, Minnesota Democrat Colin Peterson, and Donald Trump’s own energy advisor, North Dakota Congressman Kevin Cramer. (Trump himself did not embrace the idea, nor have either of the Democratic Presidential candidates.)

So right now the Saudi bet is paying off—now it’s up to oil importing nations like the US to decide if they want to be whipsawed by $100 oil (or higher) yet one more time—or if they will embrace clean transportation, save trillions, defang Russia and the Wahhabis, with pollution free alternatives to oil.

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The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

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DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.